Plans by Treasury secretary Tim Geithner to fund a carry trade for investors to purchase toxic assets from the banks was bang in line with the grand US tradition of using state finance to bolster capitalism.

In years gone by, a similar ruse was used by the state-sponsored Resolution Trust Corporation to resolve the US savings and loans crisis. Fannie Mae and Freddie Mac supplied support to mortgage lenders for years prior to the financial brick wall they ran into last year.

As it turned out, the US taxpayer made a tidy profit from the S&L crisis, as the assets recovered their value. It can only be hoped that the same can be said for the new plan, but the short-term effect has been instant, and much better than Geithner's last plea to an unimpressed market in early February.

Stocks rallied as soon as Geithner confirmed that state loans and subsidies would be used to help asset managers buy up to $1 trillion of toxic assets for banks on the cheap. To no one's surprise, fixed income specialists - led by Pimco and BlackRock - were quick to welcome the proposals, which stand to bolster their fee income.

Apart being a better stab to solve the problem than his previous attempts, Geithner's move was neatly timed to fuel the rally in stocks which started last week.

It happens that an awful lot of strategists have been pinning their hopes on a significant rally in equities in the first half of this year and Geitner would not want to leave them disappointed.

Overnight the S&P 500 index was up more than 7%. Asian stocks were strong. It's just too bad that the recovery in the UK tailed off on the back of shock inflation figures which suggest that the fall in the pound is feeding through into higher prices which, in a worst case scenario, could force interest rates back up again.

The latest housing data also demonstrates an uptick in sales of US residential properties, whose 2007 to 2008 price falls triggered current problems: economic growth at a sub-par level could now be on the cards in 2010. Even the US ABX index, which tracks sub-prime loans, has bounced on the back of the news. At the very least, prices can now be set, and assets traded.

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Overall deterioration in Western economies, and the potential debasing of their currencies through bank rescues, is likely to escalate in the months ahead. The Wall Street Journal has just reported that China, an extensive investor in US Treasury bonds, is so unhappy with prospects for the dollar that it wants it replaced as the world's reserve currency.

If the safe haven status of the dollar disappears, the picture will change completely, knocking out a crucial leg of support for the US. That is a long way from happening and emerging markets are still flooding to the dollar as their own economies crumble. However, the mere fact that the Chinese Central Bank is making these noises will ruffle feathers in the West.

Further uncertainty is stoked by Congressional proposals to tax bonus payments for executives working at banks in receipt of state support. According to Bob Doll, equities investment chief at BlackRock: "Should the proposed tax be enacted, we believe it would cause many recipients to leave the problem as quickly as possible, undermining the entire idea of rebuilding the banking system."

All that said, quality equities are cheap relative to bonds in a period where fear of inflation is starting to mount. There has to be a chance that the rally will be sustained for a little while yet.